Bond yields ease on hopes of rate cut

Yields on government bonds continued to fall as comments from top official of the Reserve Bank of India (RBI) raised hopes of a rate cut in the upcoming monetary policy review this month.

RBI Deputy Governor Subir Gokarn on Monday said that the downward trend in crude oil prices and core inflation has provided some elbowroom to the central bank for further monetary easing. “Notwithstanding the rupee depreciation over this period, the drop in oil prices has gone a bit above the extent of rupee depreciation. So, there is some elbowroom there,” said Gokarn.

The RBI is scheduled to announce the mid-quarter monetary and credit policy review on June 18.

The yields on the 10-year benchmark government bond closed at one-and-half-month-low of 8.34 per cent, three basis points (bps) lower than the close on Friday. Last week, yields gave up levels above 8.5 per cent post announcement of India’s gross domestic product (GDP) data. In January-March 2012, GDP came at 5.3 per cent, which is the lowest level in nine years.

Markets are factoring in a policy rate cut two weeks from now. “We will look for 50 bps cut in cash reserve ratio and 25 bps cut in policy rate on June 18,” said Moses Harding, head-ALCO and Economic & Market Research at IndusInd Bank.

Rupee depreciated by 12 paise against the dollar as foreign investors withdrew from risky assets amid risk off sentiments on Monday. Rupee closed at 55.66 per dollar on Monday against 55.54 per dollar on Friday.

Call rates shoot up
Call money rates shot up on the overnight call money market on Monday on lack of liquidity in the banking system amid less demand from borrowing banks. The rate finished remarkably higher at 8.20 per cent from last close of 7.80 per cent. It moved in a range of 8.35 per cent and 8.15 per cent. The Reserve Bank of India under the Liquidity Adjustment Facility purchased securities worth Rs 93,355 crore in 40 bids at the one-day repo auction at a fixed rate of eight per cent.